We explain what liabilities are, how this type of accounting obligations are classified and their relationship with assets and net worth.
What is passive?
Liability, in financial accounting, is understood as the obligations of a person or company, that is, its debt with various types of creditors. The liability is then the opposite of the asset, which represents the assets and financial rights that said person or company possesses.
In this sense, liabilities include all contractual commitments and debts, collected in promissory notes, payment commitments, consumption pending settlement, salaries payable, taxes generated, etc. and all of them must be deducted from the net worth of the company or person since they are capital outflows (investments or losses).
The liabilities of a company are part of the information clarified in a balance sheet (accounting balance sheet), where they must be distinguished from assets.
They are, along with net worth, the possible sources of financing for a company, with liabilities always being a form of external or external financing (indebtedness).
Therefore, the payment of liabilities is usually prioritized to acquire solvency, and often the record thereof of a company or a person serves as a reference for their credit evaluation and other important financial procedures.
See also: Profitability
Liability classification
The passive can be of several types:
- Current liabilities It covers the total debts, documented or not, that the person or company has with third parties, as a result of external financing. These liabilities involve short or long-term obligations (therefore being classified as short- or long-term liabilities), depending on the stipulated date of cancellation of the debt, that is, the moment in which payment is required.
- Liability not payable This concept would cover the total reserves and own funds of a company that cannot be used as they belong to the shareholders, but which cannot be demanded by them either. However, many accountants disagree with the existence of this.
- Contingent liability An obligation arising from past events, which may or may not materialize in the future depending on certain conditions, and which may or may not become a specific payment obligation.
Relationship between assets, liabilities and net worth
We already know that assets and liabilities represent, respectively, the holdings and income and the debts and expenses of the accounting of a company or any person. For its part, The equity is the sum of the contributions of the owners once operating expenses and losses have been deducted; That is, it is the total of what is held as social capital in a company, once losses have been discounted and profits (or gains) have been added.
Said patrimony is, therefore, made up of patrimonial elements, which are the list of the different assets and liabilities to be taken into account.
Net Equity is called, then, the sources of financing that a company or person has, that is, the own resources that it has available without financing from third parties (which generates a liability).
So that:
- The asset is the set of assets owned, as well as their rights of use and transformation, capital, debts receivable. They are the destination (use) of the financial means and the economic structure of the company.
- Liabilities and equity are the sources of financing, external and internal respectively, available to undertake a project. They are the source (origin) of the financial means, and make up the financial structure of the company.
Hence, the equity balance of a company is achieved by comparing or collating its economic structure (active) and its financial structure (liabilities + net worth). Also, the following numerically quantifiable relationships may occur:
- Assets = Liabilities + Net Equity
- Net Worth = Assets – Liabilities
